The IRS issued final regulations on July 9, 2026, identifying certain charitable remainder annuity trust (CRAT) arrangements as “listed transactions.” The rules focus on transactions involving a single CRAT and a single premium immediate annuity (SPIA) where taxpayers attempt to report CRAT distributions under annuity tax rules rather than under the special ordering rules that apply to CRATs.
For taxpayers and advisors, these regulations signal increased IRS scrutiny of such transactions, with a “listed transaction” being a type of reportable transaction that the IRS has identified as having potential for tax avoidance and that carries heightened disclosure obligations. As with any listed transaction, Material Advisors and certain participants may be subject to reporting with respect to these transactions, as well, along with significant penalties for failing to properly disclose their involvement.
Understanding CRATs and Their Traditional Use Under Section 664(c)
A CRAT is an irrevocable trust that can help donors balance charitable goals with income, estate, and tax planning objectives. One of the primary tax benefits of a CRAT is that the donor may receive an upfront charitable donation income tax deduction when the CRAT is funded. The deduction is based on the present value of the charitable remainder interest that is expected to pass to charity at the end of the trust term.
When properly structured, a CRAT generally is not subject to income tax at the trust level under IRC Section 664(c). The sale of appreciated assets by the trust can create a tax deferral opportunity rather than an immediate tax liability at the trust level. The deferral does not eliminate tax for the noncharitable beneficiaries. Distributions from the CRAT remain taxable to the beneficiaries under the Section 664(b) ordering rules, which require the trust’s ordinary income and capital gain to be subject to tax before any amount is treated as a return of corpus.
The Transaction Drawing IRS Scrutiny (Section 72) – CRAT-SPIA Structure
The transactions drawing IRS attention generally involve certain arrangements structured as CRATs funded with appreciated property. The trust uses some or all of the sale proceeds to purchase a SPIA. The beneficiary then attempts to treat the CRAT annuity payment as if it were an annuity payment governed by Section 72, rather than a trust distribution governed by the ordering rules.
Section 72 can allow a portion of certain annuity payments to be treated as a recovery of investment in the annuity contract. In the CRAT-SPIA structure, taxpayers may argue that a significant portion of the beneficiary’s payment is excluded from income as a return of the SPIA investment. Treasury and the IRS view this position as a misapplication of the rules because CRAT distributions are separately governed by Section 664(b), which carries out ordinary income and capital gain to noncharitable beneficiaries before amounts are treated as corpus.
Listed Transactions and Disclosure Requirements
The final regulations identify certain CRAT-SPIA arrangements and substantially similar transactions, as listed transactions. This does not mean that every CRAT or every CRAT involving an annuity product is abusive. Rather, the listed transaction focuses on arrangements with specific features, including a CRAT-SPIA structure in which the beneficiary reports the CRAT annuity payment under Section 72 instead of under the Section 664(b) ordering rules.
Treasury and the IRS have made clear that they view this strategy as having the potential to avoid or significantly reduce taxable gain. Under the final regulations, taxpayers who participate in an identified CRAT-SPIA transaction or a substantially similar arrangement may be required to disclose their participation to the IRS under the reportable transaction rules. Material advisors may also be subject to disclosure requirements and recordkeeping obligations. In addition, participants and material advisors may be required to provide detailed information regarding their involvement in these listed transactions.
Failure to comply with these disclosure requirements can result in significant penalties under the reportable transaction rules, including penalties applicable to listed transactions. Penalties for failure to disclose can reach up to $100,000 for an individual, and there is no general good-faith exception for failing to disclose a listed transaction.
Charitable Remainder Organizations
The final regulations provide relief for certain charitable organizations whose only role or interest in the transaction is as the charitable remainderman. The organization generally is not treated as a participant in the listed transaction and is not treated as a party to a prohibited tax shelter transaction solely because it holds the charitable remainder interest.
Implications for Estate Planning and Tax Professionals
Charitable planning strategies should be evaluated carefully when they promise significant tax benefits that appear inconsistent with the underlying policy of the tax rules.
Estate planning and tax professionals advising on CRAT planning should review existing and proposed structures involving annuity products. The review should determine whether the arrangement falls within the identified transaction, or is substantially similar to it, and whether distributions are being reported under the Section 664 CRAT ordering rules rather than under Section 72.
Advisors should evaluate potential disclosure obligations for both taxpayers and material advisors and also maintain documentation supporting the economic and charitable objectives of any legitimate CRAT arrangement.
Strategic Considerations
Traditional CRATs remain valuable charitable and estate planning tools when structured and administered in compliance with applicable tax rules. As the IRS continues to scrutinize sophisticated trust and charitable planning strategies, taxpayers and advisors should carefully review both new planning opportunities and existing CRAT structures, particularly those involving annuity products.
Recent regulations targeting certain abusive CRAT transactions are a reminder that charitable remainder annuity trusts should be structured and administered in accordance with the applicable tax rules and their intended charitable purpose. Careful planning and ongoing oversight are essential to preserving the intended tax benefits and charitable objectives.
Key Takeaways
- Properly structured and implemented CRATs remain valid charitable planning vehicles.
- Treasury and IRS have identified certain CRAT-SPIA arrangements and substantially similar transactions as listed transactions effective July 9, 2026.
- The targeted transactions generally involve an attempt to apply the Section 72 annuity rules rather than the Section 664(b) CRAT ordering rules to CRAT distributions.
- Participants and material advisors may have disclosure obligations and face penalties for noncompliance.
- Tax professionals should review existing and proposed CRAT arrangements involving annuity products to determine whether additional reporting may be needed.
Please contact our tax professionals with any questions.
Internal Revenue Service, Charitable Remainder Annuity Trust Listed Transaction, T.D. 10051, 91 Fed. Reg. 42353 (July 9, 2026).
FAQ
A CRAT-SPIA transaction generally involves a charitable remainder annuity trust (CRAT) that uses proceeds from the sale of appreciated assets to purchase a single premium immediate annuity (SPIA).
The IRS believes some taxpayers have improperly reported CRAT distributions under Section 72 annuity rules instead of the Section 664(b) ordering rules that apply to CRATs, potentially reducing taxable income.
No. The regulations target specific CRAT-SPIA arrangements and substantially similar transactions, not properly structured CRATs used for legitimate charitable and estate planning purposes.
Taxpayers who participate in identified transactions and material advisors involved with them may have disclosure and recordkeeping obligations under the reportable transaction rules.
Failure to comply with disclosure requirements can result in significant penalties, including penalties that may reach up to $100,000 for individuals.
Review existing and proposed CRAT arrangements involving annuity products, confirm distributions are reported under the appropriate CRAT rules, and assess any potential disclosure obligations.
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